Well-known outperforming fund manager Neil Woodford reckons he built his portfolio on the expectation that it will receive little help from macroeconomic trends.
If the firms he’s holding deliver decent investor total returns it will be because they stand on their own merits and achieve advances by hard-earned business growth, operational efficiency, and effective execution of their strategies.
Today, I’m looking at three firms featured in the top twenty largest holdings of the CF Woodford Equity Income Fund: AstraZeneca (LSE: AZN), Imperial Tobacco Group (LSE: IMT) and Provident Financial (LSE: PFG).
A defensive with potential
Last year’s takeover bid from Pfizer raised the stakes for potential AstraZeneca investors when the share price shot up. However, the shares are now around 12% off their highs, which makes the valuation start to look reasonable again.
Patent expiry issues caused havoc in the pharmaceutical sector over the last few years, but year-on-year earnings’ slippage seems to be levelling out at AstraZeneca. Meanwhile, I get the feeling that the firm’s development pipeline is building pressure like a coiled spring about to blast out a new generation of blockbusting patent-protected bestsellers.
Mr Woodford has kept faith with AstraZeneca all along — he was holding the shares in the wake of last decade’s credit-crunch as patent expiry hit, he held at the top of the Pfizer valuation bubble, and he continues to hold now. That suggests he sees value in this pharmaceuticals defensive, cash-producing credentials and could be holding out to capture what may be significant growth in the years to come.
At today’s share price of 4270p, AstraZeneca’s forward price-to-earnings (P/E) ratio sits at 16 or so, and City analysts following the firm expect earnings to slide 4% during 2016. The dividend yield runs at just under 4.3% with those forward earnings covering the payout about 1.5 times. AstraZeneca still isn’t cheap but could grow into its valuation for share holders if improved earnings start to come through.
A rising dividend in a shrinking market
Imperial Tobacco Group’s cigarettes are consumable products that generate reliable cash flow. In recent years, the firm has done a good job of directing much of the cash generated to share holders through the dividend.
Although in the wider tobacco industry volumes are falling, Imperial Tobacco has made the most of its cash flow by bearing down on costs and driving up profits by raising sale prices. To give investors more bang for their buck, the directors drove up earnings- and dividend-per-share figures by using some of the firm’s cash to buy back its own shares. To be holding now, I reckon Neil Woodford must believe that Imperial Tobacco can work more of its magic in the years to come.
At today’s share price of 3369p, Imperial Tobacco trades with a forward P/E rating just over 14 and a dividend yield of 4.6% for 2016. City analysts reckon earnings will grow 13% that year and cover the payout a comfortable 1.5 times.
A financial operator on the fringe
Provident Financial describes itself as one of the UK’s suppliers of personal credit products to the non-standard lending market — that means the higher risk 20% or so of borrowers who might not enjoy a clean credit history, or who might find it more difficult to borrow from mainstream suppliers. Typically, interest rates are higher on non-standard products, presumably to cover the extra risk that firms such as Provident Financial face.
Provident Financial operates a network of more than 200 branches around the country as well as call centres and customer-facing websites. The firm also employs an army of 7,700 agents based in local communities to visit home credit customers weekly to collect payments and sell further products.
The shares have put on about 320% since the end of 2010, making Provident Financial a good call for investment through the austerity of recent years. However, with the economy improving, I wonder if the best time to hold the share might have passed. There’s no doubt that Provident Financial has a large element of cyclicality to its business.
At today’s share price of 3093p, the forward P/E rating runs at almost 18 and the dividend yield is 4.2% for 2016. City analysts expect earnings to rise 8% that year and to cover the payout 1.3 times. Provident Financial isn’t cheap, so I’ll watch from the sidelines.
